Monday 28 March 2016 13.56 EDT
First published on Monday 28 March 2016 13.49 EDT

An academy chain responsible for five secondary schools that was praised by David Cameron and Michael Gove is to be stripped of all its schools, according to sources close to the Department for Education (DfE).

The Perry Beeches academy trust is to have its five academies and free schools in Birmingham handed over to a new academy trust following a critical financial investigation.

A report by the Education Funding Agency (EFA), published before Easter, showed financial shortcomings at Perry Beeches, including third-party payments made to the chief executive, Liam Nolan, on top of his £120,000 salary as executive headteacher. The EFA’s call for urgent action triggered an official notice from the DfE, which detailed “serious concerns about financial management, control and governance” at the trust.

The five Perry Beeches schools are expected be “rebrokered” by the DfE and pass to a new chain, the West Midlands academies trust, which is headed by David Kershaw, a Labour cabinet member of Coventry council.

A Whitehall source said: “This shows the academy system is working, with the EFA identifying issues and regional schools commissioners intervening and rebrokering effectively, as part of a robust system of oversight.”

Perry Beeches declined to respond to requests for comment through its PR agency. However, the agency forwarded a comment from Nolan, who said: “I do not know who is brokering this deal. This would be done by the directors of the academy trust. I am an employee and won’t be involved in that brokering.”

An aerial view of the first Perry Beeches academy, where Liam Nolan became headteacher in 2007. Photograph: David Bagnall/Rex/Shutterstock

For Nolan, the financial unravelling of the trust may overshadow his record as a successful headteacher. From 2007, he transformed the first Perry Beeches academy in inner-city Birmingham and won outstanding judgments from Ofsted.

Nolan’s recipe of hard work and improved results was as popular with ministers as with parents. “Parents want a structured, organised, disciplined education for their children. It is happening in the very best independent and the very best grammar schools. Why shouldn’t it be open to children from normal comprehensive schools?” Nolan said in a DfE publicity video.

Nolan embraced the free school reforms introduced by the Conservatives, although he is personally a vocal Labour supporter. Gove returned the compliment, telling the 2012 Conservative party conference: “The two best schools in Birmingham are Perry Beeches I and Perry Beeches II.”

The investigation by the EFA, the DfE arm responsible for financial oversight of academies, took six months after it first received evidence from a whistleblower in September last year.

Lucy Powell, the shadow education secretary, said the catalogue of events “should ring alarm bells” over the government’s regulation of multi-academy trusts. “This decision raises serious questions about accountability and financial management of academy chains and ministers’ ability to police the system they have created,” Powell said.

“Parents and local communities will be deeply worried that this government has failed to put in place the appropriate checks over academy chain funding decisions, prioritising converting schools into academies over school standards and the protection of public money.”

The DfE would not publicly discuss the move, though a spokesperson said: “We are currently working with Perry Beeches academy trust to ensure it addresses concerns raised and this remains our priority.”

The prime minister opened one of Perry Beeches’ new free schools in 2013, when he praised the “brilliant team” at the trust. In 2012 Nolan addressed the Conservative party conference and appeared on stage with Gove, then the education secretary, who described Nolan as “wonderful”.

Last year, Gove’s successor Nicky Morgan told school leaders that Perry Beeches was evidence that by “working together through multi-academy trusts, schools can achieve truly extraordinary outcomes”.

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The EFA investigation of Perry Beeches uncovered irregularities including nearly £1.3m in payments without contracts to a third-party supplier, Nexus. That company also subcontracted to a company named Liam Nolan Ltd, paying Nolan a second salary for his role as chief executive and accounting officer of the trust.

“Evidence confirms that the accounting officer of Perry Beeches multi-academy trust is being paid for his services as the chief executive officer (CEO) through Nexus and then Liam Nolan Ltd, in addition to his salary as executive headteacher,” the EFA report said.

The report concluded that “the academy paid Nexus £72,000 including VAT in 2013-14 and £88,800 plus VAT in 2014-15 for the CEO role”, in contravention of academies’ financial rules and Treasury guidelines.

A separate report by the EFA found that eligibility for more than £2.5m worth of free school meal (FSM) funding could not be checked because the relevant records to 2015 were deleted by the trust. “The trust has breached the academies financial handbook by failing to retain any form of FSM eligibility evidence for a period of six years,” the EFA concluded.

After the EFA reports were published last week, Nolan told the TES that he was stepping down as the trust’s chief executive and would take a pay cut as executive head.